Refi clock goes tick-tock, even as rates drop

As mortgage rates climbed in the last half of January, many refinancers and potential homebuyers were reminded they are running out of time to take advantage of the low-rate environment. Rates barely moved this week, but the clock is still ticking, say industry observers.

30 year fixed rate mortgage – 3 month trend

30 year fixed rate mortgage – 3 month trend

The benchmark 30-year fixed-rate mortgage fell to 3.76 percent from 3.77 percent, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index stood at 4.14 percent; four weeks ago, it was 3.67 percent.

It's unlikely that rates will fall back to the record lows seen last year, and borrowers realize that, says Brett Sinnott, director of secondary marketing at CMG Mortgage Group in San Ramon, Calif.

"There were two or three days of panic last week, when people were trying to lock (a rate)," he says.

Weekly changes in rates are often too small for average borrowers to notice, but loan officers have been alerting their clients. They are reaching out to those who previously inquired about a purchase loan or a refinance to tell them that they need to get their paperwork ready soon.

"Sooner or later, rates are going to go up and stay up," says John Stearns, a mortgage banker at American Fidelity Mortgage Services in Mequon, Wis.

Homeowners who have been able to refinance in the fourth quarter of last year reduced their mortgage rates by about 33 percent, or an average of 1.8 percentage points, according to a report released by Freddie Mac this week.

"On a $200,000 loan, that translates into saving about $3,600 in interest during the next 12 months," says Frank Nothaft, Freddie Mac vice president and chief economist.

The larger your mortgage, the more you have at stake when deciding whether to refinance, Stearns says. He is working with many homeowners who refinanced about a year ago or less. Still, they are able to reduce their monthly payments significantly with the rates available today.

"If you can drop your rate by a quarter of a percentage (point) and you owe $300,000 or $400,000, it makes a difference," he says.

What's putting pressure on rates?

As long as the Federal Reserve continues to purchase about $85 billion per month in U.S. Treasury and mortgage bonds, rates are not likely to spike above 5 percent anytime soon, analysts say.

But there are several factors putting upward pressure on rates. Rising home prices and improvements in the labor market have boosted the confidence of many investors. When investors are confident, they pull money out of the bonds market and invest in riskier assets.

"Rates are up and holding steady, waiting for some bad news, which might come in the form of a stock market drop," Stearns says.

Housing market

U.S. home prices in December were 8.3 percent higher year-over-year, real estate data provider CoreLogic said Tuesday. That's the strongest result since 2006.

The volume of mortgage applications from homebuyers increased 2 percent last week and was at its highest level since May 2010, according to a weekly survey by the Mortgage Bankers Association.

Sinnott says he has seen an uptick in applications from homebuyers. Most have been from renters who have realized that a mortgage payment could be less than they pay in rent.

"As rents continue to climb, you will see a common trend of people getting into the purchase market," he says.